The VIX is moving higher today, reflecting an increased appetite for SPX puts over calls, but is it up more than it should be? At 18.57 as of 12:45 pm est today the VIX is higher than it has been since late June, when the market was below 1,600. That signals that there is greater fear now, following a modest 3.4% drop since 9/19 then there was following a 4 day drop of 5.5% from 6/19-6/24. That doesn’t make much sense to me but I guess it is open to each persons subjective interpretation.
For me this move in the VIX relative to where the market is heightens a great fear that this pullback off of all time highs is about to turn into a full blown downtrend with a 10-20% drop being expected. I simply am not ready to bet on that scenario until the market breaks below 1670. While one can argue that the SPX has already broken key support at 1700, 1650-1670 is an area of a lot more congestion over the last 100 days than 1700 was.
I suppose one interpretation of the VIX’s action is that it is reacting to the increasing possibility of a U.S. debt default, or just the anxiety that will surround a deal being struck overall. That to me is a much fairer assessment of the VIX. I believe if the market really thought a default was in play that we would be down much more than we are today, especially considering that this is exactly where the market found itself last Monday, and that proved to be the lower price range for the week.
My recommendation is to play stock picker here by identifying stocks in directional trends that are near key reference points you can trade against. NFLX & PCLN are 2 such stocks. Both have moved directionally higher, but are currently resting above support levels at $318 and $1044, that if broken reveal a very close stop loss level, but if held make for great rewards on a bounce back above $325 and $1050, respectively. BAC is a stock that has moved directionally lower, taking out important support at its August low and has so far failed to re-establish itself above the key $14 level. I like a short trade on BAC vs $14, targeting a $13.60 breakdown.
As for the market in general I’ve got a primary set up and secondary set up I’m watching. My primary set up is over/under 1670 as I believe that is a very important support level where a lot of longs will bail if it breaks, and a lot of shorts (sideline money) will come in if it holds. My secondary level is over/under 1680 for more of an immediate term trading perspective.
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